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Supreme Court Says States Are Liable For Misspending of Chapter 1 Funds

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Washington--The U.S. Supreme Court ruled last week that two federal appeals courts improperly absolved Kentucky and New Jersey of liability for having misspent a combined total of $1.3 million in federal compensatory-education aid in the early 1970's.

In both cases, Bennett v. New Jersey (Case No. 83-2064) and Bennett v. Kentucky (No. 83-1798), the Justices sided with the federal government, holding that the appeals courts mistakenly set aside federal auditors' findings by misconstruing regulations governing Chapter 1 of the Education Consolidation and Improvement Act of 1981. The program was known as Title I at the time of the allegedly improper expenditures.

According to the Court's rulings, Chapter 1 grantees cannot contest auditors' findings by claiming that they spent federal funds in good faith. In addition, they cannot justify questionable past expenditures by arguing that such expenditures would be allowable under regulations now in effect.

A Victory for E.D.

Lawyers for the Reagan Administration had warned the Court that the Education Department's ability to recoup misspent Chapter 1 funds would have been "eviscerated" if the lower-court decisions had been allowed to stand. The department is currently attempting to collect a total of $78 million in questionable Chapter 1 expenditures across the nation.

Nine states that supported Kentucky's fight against the federal government predicted in papers filed with the Court that a ruling in the Administration's favor would punish "the very persons [the government] sought to aid" by forcing3school districts with high concentrations of poor children to return to the government funds that they can ill afford to lose.

They also alleged in their friend-of-the-court brief that the department's audit demands typically are "grossly overstated," adding that "unconscionable abuses ... are common in the audit process."

Retroactive Application

In the New Jersey case, the Court voted 6 to 2 to overturn a December 1983 ruling by the U.S. Court of Appeals for the Third Circuit, which held that the state did not have to repay over $1 million in Chapter 1 funds allegedly misspent in Newark between 1970 and 1972.

A regulation in effect at that time specified that school districts had to spend their Chapter 1 funds only in those schools where the proportion of children from low-income families equaled or exceeded the districtwide proportion of such children. In 1975, federal auditors determined that 13 Newark schools received Chapter 1 funds in violation of that regulation.

New Jersey officials originally argued that the federal government did not have the legal authority to demand repayment of misspent Chapter 1 funds, a position rejected by the Justices in 1983. (See Education Week, June 8, 1983.)

When the case was sent back to the Third Circuit Court, lawyers for New Jersey took the position that an amendment to Chapter 1 adopted by the Congress in 1978 effectively repealed the regulation that the auditors' finding rested on. They persuaded the appeals court to apply the more liberal 1978 standard retroactively to the expenditures made in 1970 through 1972, thus reducing the contested amount of misspent funds to about $250,000.

Writing for the majority, Associate Justice Sandra Day O'Connor6held that the 1978 amendments "do not affect obligations under previously made grants."

'Practical Considerations'

"Practical considerations related to the administration of federal grant programs imply that obligations generally should be determined by reference to the law in effect when the grants were made," Justice O'Connor wrote.

She noted that the auditors, who finished their review of the disputed expenditures in 1975, "could scarcely base their findings" on standards announced three years later. Similarly, she reasoned, New Jersey "had no basis to believe that the propriety of the expenditures would be judged by any standards other than the ones in effect at the time."

"Requiring audits to be redetermined in response to every statutory change that occurs while review is pending would be unworkable and would unfairly make obligations depend on the fortuitous timing of completion of the review process," Justice O'Connor concluded.

Intent Said Ignored

"I simply cannot understand how the Court reaches the conclusion that its disposition of this case accords with the intent of Congress," wrote Associate Justice John Paul Stevens in a dissent joined by Associate Justice Thurgood Marshall.

Justice Stevens wrote that when the law was enacted in 1965 and amended in 1978, the Congress stated that it intended to grant state and local school officials broad discretion in spending Chapter 1 funds. He also noted that federal deregulation was the primary intent of the 1981 law that significantly revised the program.

"The Court holds now that the repudiated [1978] regulations must be strictly enforced," Justice Stevens wrote. "It is the Court's holding, rather than an application of the 1978 amendments to this case, that results in a manifest injustice."

Supplement, Not Supplant

The Kentucky case centered on an auditor's finding in 1976 that 50 school districts in the state had misspent $338,000 in Chapter 1 funds two years earlier, in violation of a regulation requiring that funds from the program be used to supplement, and not supplant, state and local expenditures for education.

The disputed programs involved "readiness classes" for educationally disadvantaged students in place of regular 1st- and 2nd-grade classes.

In September 1983, the U.S.3Court of Appeals for the Sixth Circuit ruled that although Education Department officials' interpretation of the regulation was reasonable, the state had "substantially complied" with the law's requirements in good faith and therefore did not have to repay the government.

No 'Good Faith' Exception

"There is no indication [in Chapter 1] that grantees may avoid repayment by showing that improper expenditures were made in good faith," wrote Justice O'Connor in the unanimous opinion overturning the Sixth Circuit Court's ruling. "Nor do we think that the absence of bad faith absolves a state from liability if funds were in fact spent contrary to the terms of the grant agreement."

Justice O'Connor acknowledged6that the Education Department enforced the law inconsistently and unclearly in its first years, thereby confusing state and local officials about their responsibilities. Nevertheless, she rejected Kentucky's argument that it was the obligation of the Education Department to warn grantees in advance of the types of programs that could run afoul of the law.

"Given the structure of the grant program, the federal government simply could not prospectively resolve every possible ambiguity concerning particular applications of the requirements of [Chapter 1]," Justice O'Connor wrote. "Moreover, the fact that [Chapter 1] was an ongoing, cooperative program meant that the grant recipients had an opportunity to seek clarification of the program requirements."

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